Q2 2023 BRP Inc Earnings Call
Good morning, ladies and gentlemen, welcome to that'd be RP inks FY 'twenty three second quarter results conference call for.
For participants who used to telephone line. It is recommended to turn off the sound on your device.
Now I'd like to turn the meeting over to Mr. Philip This Shane. Please go ahead, Mr. Just Shane.
Judy Good morning, and welcome to <unk> Conference call for our second quarter fiscal year 'twenty three.
Joining me. This morning are through with the boys <unk>, President and Chief Executive Officer, and Sebastien Martel Chief Financial Officer.
Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statements will be made during the call and that future results could differ from those implied in that statement.
The forward looking information is based on certain assumptions and is subject to risks and uncertainties.
Consult <unk> M DNA for a completely of the.
Also during the call reference will be made to supporting slides and you can find the presentation on our website at <unk> Dot com under the Investor Relations section.
With that I'll turn the call over to deal with it.
Felipe Good morning, everyone and thank you for joining us.
<unk> once again demonstrated its ability to succeed in the unique operating environment.
We concluded the first half of the year on a very strong note.
By delivering our strongest quarterly revenues and normalize EBITDA ever.
Our team resiliency was further tested following the end of the quarter as we were the targets of the cyber attack, forcing us to temporarily suspend the operation.
Our quick reaction and relentless efforts allow us to contain the situation.
And limit its impact.
And a very special thanks to our team of I S. T expert who did a remarkable job from the very beginning and who have worked diligently to restore operational and system.
As this situation is causing delay in delivering product to customers.
Sincerely thank them for their comprehension.
We expect to make up for the lost all sales throughout the second half of the year limiting the impact on our result.
Consequently, with better than expected results. So far this year and supply chain improvements, we are increasing our normalized EPS guidance for the year to a range of $11 30 to $11 65 per share representing a year over year increase.
14% to 17%.
Let's turn to slide four for key financial highlight red.
Revenues reached $2 $4 billion up 28% compared to last year, driven by solid growth for side by side and three wheel vehicle and the introduction of the <unk> switch.
Normalized EBITDA was up 1% to $418 million, a normalized earning per share increased 2%, reaching $2 94.
Turning to slide five for a look at our Q2 retail performance.
Retail sales continued to be limited by product availability.
Routing in a decline of 16% for power sports product in North America for the quarter.
However, excluding personal watercraft for which shipments were delayed compared to last year, we outpaced the north American industry.
While our retail sales were down 2% industry sales were down high single digit.
The retail decline does not indicate the lack of consumer demand it reflect limited product availability in our dealer network. We are confident that retail with him as we continue to ship more product and it is in fact, what we are experiencing so far in Q3.
As shown on slide six.
As you know over the last few quarter, we have shipped unit that we're missing a few components and retrofitted them at the dealer when component are available.
This strategy is paying off as you can see on this slide at.
At the end of Q2, our network invented he was up 134%, including a significant number of unfinished units for which missing component were shipped to dealer in the last two weeks of July .
This improved unit availability led to retail growth over 20% so far in Q3.
This shows that consumer demand is still strong and everything was shipped to dealer continued to convert rapidly in retail.
Moreover, despite the higher interest rate consumer credit Acceptation remained stable and we are seeing many positive signs of continued strength in demand.
We still see a strong influx of new and trend of 41%.
Website traffic and Google's search for our different brand remain significantly higher than pre pandemic level.
Retail velocity is solid and dealer booking following our <unk> club is ongoing in order are trending up over 20% versus last year.
Turning to slide seven for a quick supply chain update.
The supply chain and veteran evolve positively as expected in the second quarter and we are seeing improvement in all key areas.
Delivery schedule of component requiring semiconductors is better we are dealing with less supplier disruption, which held the planning of our production schedule and logistics cost availability and daily level are all improving.
We are also seeing price coming down across many commodities, which could be favorable long term. However.
However, the benefit will be limited this year as input costs are mostly hedged throughout the back half of the year.
As planned these supply chain improvement puts us in a good position to increase production throughput and deliver solid growth in <unk>.
Turning to slide eight for an overview of the key product and produce at our VIP club.
In August .
It was our first in person dealer events since the start of the pandemic and their firms that combine both our pas port and marine dealers network, leading to the highest attendance ever with over 5300 participants from 55 countries.
In term of product lunches with strength and our ski doo lineup by creating a new industry segment with the introduction of the <unk> explorer probe specially designed for a longer trips on the water.
On the can am off road vehicle side, we improve our offering in the mid <unk> power sport side by side segment, a large and very popular category and we reinforce our Kid ETV lineup and industry segment that has seen significant growth in recent years.
We also unveiled upcoming product on the EV side.
Including the two initial model of our electric motorcycle lineup that origin, a dual purpose model cycle equally capable and on and off road and the cannon pulse the perfect model cycle for rides in and out of the city.
We also introduced the see the rise and electric Hydrofoil board that combine the pace of our board with the exciting sensation of filing.
This product open a totally new market for us and our research revealed that the vast majority of consumers who own our own <unk> show interest for the rise.
In addition, this is an ideal electric product since very little energy is consumed one filing.
This is a great example of innovation you can expect from us.
And you can look forward to more exciting product like this in the future.
Initial shipment of these three electric product are expected for summer 2024.
And other main highlight of the club on Slide nine was the official introduction of our new first VIP design, both lined up with their road tax stealth and gel technology.
When we launched our buy build transform strategy with the acquisition of both companies in 2018, our objective was to create the critical mass that we could leverage to transform the marine industry.
With our design innovation and technical Knowhow.
And this is exactly what we are doing with the introduction of our new menu to Andrew Metcalf and Quint Tech <unk> boat lineups that redefine the boating experience and all include our new road tax help engine.
This groundbreaking outboard engine does appear under the boat, which creates a truly integrated design and free up valuable space.
Does it bring significant benefit to the consumer in addition to being priced competitively with equivalent model on the market.
The both attracted large crowds during the club.
Our new both are very well received by marine dealers and many power sport dealers also expressed interest in carrying these product lines.
With these new lineups, we expect to gain additional market share in the large and attractive $36 billion marine industry.
It also represents an important step towards our objective of growing our marine business to $1 billion by fiscal year 'twenty five.
Moreover, these are differs both design with a modular approach, which will improve margin in our marine business as we expand this designed two additional models. We are very excited about this new step in our marine strategy.
Now, let's turn to slide 10 for a year on products.
Revenue were up 42% to $1 4 billion in Q2, representing by far our strongest quarter ever for year round products.
The growth was primarily driven by strong shipments and a favorable mix of side by side and three wheeled vehicle.
In term of retail the 2022, North American RV season ended on June 30.
And both our can am side by side any television outperformed their respective industries side.
Side by side vehicle gained ground in all three segments and had the three percentage point of market share for the season.
Both product line I've also outpaced their industry in the quarter.
Side by side, notably achieved its highest market share ever in the month of July .
And the strong retail momentum continue in August driven by improved product availability, leading to our side by side retail being up about 60% so far in Q3.
As for three wheeled vehicle.
Despite retail being down in the quarter due to limited product availability with sales outperformed the industry.
We continue to gain traction with consumer true several initiatives such has women of on the road and rider indication programs for which course completion are up significantly year to date.
We are well positioned to sustain our momentum in three wheeled vehicle with increased shipment for the upcoming months.
Turning to seasonal product on slide 11.
Seasonal product revenues were $691 million up 20% from last year.
Driven by the introduction of <unk> switch as well as by favorable pricing and mix for personal watercraft.
Looking at the retail or retail for peripheral autograph in the second quarter was impacted by limited product availability due to the daily unit shipment, which will take place later than usual in the season.
This resulted in retail down low 30% in the second quarter, but up high 20% so far in the third quarter.
While the daily of deliveries was not ideal the momentum in our CLO business is very strong and demonstrated by solid booking trends for example in its second year dealer order for the model year 'twenty three CDO switch are trending about three times higher than the actual.
Production of model year 'twenty two.
As far as snowmobile. We are currently in the slow period of the year, but we are very well positioned for the upcoming season with a record level of unit pre sold to consumers.
Continuing on slide 12, with the look at power sport parts, and accessories and apparel and OEM engines.
Revenue were up 4% to $257 million for the quarter.
Our revenue continued to benefit from our growing product portfolio, which led to higher replacement parts and the popularity of our accessories driven by the link ecosystem.
However growth was limited in the quarter due to lower volume of accessories for personal watercraft in light of daily unit shipment.
Looking ahead.
And they remain a key growth area for us.
Our focus on innovation will also further drive consumer interest for accessories.
This includes bringing the link system to our expanded both lineup and introducing product with a high potential for had done accessories sales such as the explorer.
The explorers DC to explorer.
Moving to marine on slide 11.
<unk> revenue reached $132 million up 5% from last year, driven by a more favorable product mix.
Partially offset by lower boat shipments.
Looking at retail sales.
In North America, mainly to perform well with retail up low teen percent in the quarter, while <unk> was down low 20%, reflecting our exit from fully welded boats.
In the Australian market, the second quarter represents the off season, and tailwater retail was down on lower volume.
Looking ahead as mentioned earlier, we are shifting our focus to the next bode generation with their road tax sell engines.
Production of these boats will begin to ramp up in the fall and this should be available to customers in the in time for the next boating season.
With that I'll turn the call over to Sebastien.
Thank you Jose and good morning, everyone. Thanks to the sustained robust demand for our products and the improving supply chain environment, we delivered our strongest quarter ever in terms of financial results.
Looking at the numbers, our revenues for the quarter up 28% versus last year, reaching $2 4 billion.
Our gross profit margin was roughly in line with our expectations ending at 24, 7%, but was down in comparison to last year's level as the benefit from volume mix and pricing was more than offset by supply chain and inflation.
Which both impacted logistics commodities and labor costs.
We continue to tightly manage our expenses leading to strong normalized EBITDA of $418 million.
Representing a normalized EBITDA margin of seven point 17, 2%.
Our normalized net income came in at $238 million, resulting in normalized earnings per share of $2, 94% up 2% from last year's Q2.
From a cash flow perspective, we generated $332 million of operating cash flow and we continued investing in growth with $112 million of capex, resulting in $220 million of free cash flow generation for the quarter.
We also sees the opportunity to further strengthening our balance sheet by increasing our revolver capacity by $400 million.
And raising a $100 million term loan these actions provided us with the flexibility to continue investing in our long term growth.
Notably as we recently announced three acquisitions, all the while maintaining the capacity to make the necessary investments in working capital and ensure that we maximize our production output and sustain our solid retail performance and the current environment.
Moving to our network inventory on slide 16 year over year, our network inventory is up over 130% with most of the increase being driven by strong shipments of missing components to dealers late.
In the quarter.
This was particularly true for our side by side business as our network inventory at the end of July was three times higher compared to what it was last year, leading to retail growth of about 60%. So far in Q3 and positioning us well to meet customer demand throughout the back half of the year still.
Still inventory levels remain very low from a historical perspective being down 44% in comparison to the second quarter of fiscal year 'twenty.
As you'll see highlighted earlier, our strategy of retrofitting units at the dealership is paying off.
As these shipments of components towards the tail end of the quarter. That's a very strong retail growth of over 20, 20% so far in Q3.
Now looking at slide 17 for an update on the guidance for the year.
Before getting into the numbers I would like to come back on the impact of the cyber incidents, which we work victim of earlier in August as we communicated when the third our monitoring system as rapidly detected the breach and allowed us to take this third precautions to limit the impact.
Soon after we put into action our plan to progressively restart operations and most of our sites were operational within a couple of weeks.
All in all we lost somewhere between one to two weeks of production depending on the facility.
However, as previously disclosed we expect no impact from this event on our guidance. This year as first we expect to recoup part of the production loss by working weekends and overtime and second while the incident resulted in downtime from a manufacturing standpoint, we continue to receiving components throughout that period and ultimately.
These components will be used to reduce the level of unfinished inventory plan for the rest of the year and therefore allow us to deliver more wholesale from these units.
So from a revenue standpoint, we expect to be able to offset the volume loss and then some with this now let's go over the updated guidance our updated guidance reflects our stronger than anticipated second quarter results. Our expectation that we will offset the impact of the cyber incident through overtime and additional conversion of retrofit unit.
And an improving supply chain environment favorable to higher production and to higher throughput of fully completed units in the second half of the year.
Given this we now expect to be able to deliver more side by side in seasonal products versus our previous guidance. As a result, we therefore expect our total revenues to grow between 26% and 31% for the year and normalized EBITDA to grow between 14 and 17%.
These adjustments results in a 30 bps improvement in our normalized EPS is now expected to end between 11% and 30 and $11 65, representing a growth of 14% to 17% over last year.
As you have already realized this implies a very strong second half of the year as you can see on slide 18. In fact, we expect to deliver record results in the second half of the year with revenues up 27% to 36% and normalized EBITDA up 41% to 48% compared to the first half we are well positioned to deliver that.
These strong results given the improvement in the supply chain, which we expect will allow us to increase production and drive higher volumes of fully completed unit, resulting in stronger wholesale and margins and second the continued robust demand for our products with robust retail so far in Q3 high level of snowmobile.
Preorders very positive reception of our new product introductions, leading to strong momentum with bookings following the recent club and a very solid inventory replenishment opportunity.
In terms of how we see H to unfold, we expect normalized EPS to be up over 50% in Q3, and the rest of the growth to come in Q4, resulting in a record second half.
On that note I will turn the call back to Jose.
Thank you Sebastien.
Before concluding I would like to briefly discuss the acquisition announced in July and August .
At our Investor Day in June I pointed to significant opportunities in power sports and marine which support our M. 25 objective of reaching 12 to $12 5 billion dollar of our revenue and $13 50 to $14 50 of normalized EPS.
We're also looking at expanding our addressable market to support our growth beyond fiscal year 'twenty five.
One of these opportunities is our entry in the $15 billion European and North American two wheel motorcycle industry with the introduction of our electric cannot motorcycle firmly.
These new products were very well received at the VIP club.
We're also exploring other market in mobility, and <unk> services as well as in low voltage EV product as an example, the see the rise electric ideal fall is the first product being introduced that come from exploring such market.
This is just the beginning you can expect more innovation from us in the next few years in total we estimate these new market to be worth about $70 billion and there is room for us to capture significant market share.
And to support our ambition in this field, we recently announced three key acquisition as shown on slide 21.
These acquisitions are great wall Motor Austria.
And welcome a team of 53 experienced engineers technician and professional specialized in the development of E drive system and transmissions.
And 80% stake in opinion from Germany, a pioneer in the development design Assembly and sales of compact gearbox technology for traditional and electric bicycle.
And the Canadian power sport operation of Kongsberg, a longtime suppliers of ours specialize in electronic and <unk> production development and manufacturing.
All of these acquisition are expected to support our long term growth by adding key capabilities and knowhow to support our EV strategy and then three in new market.
I am very excited with these acquisition that bring us great talent and innovation opportunities.
In conclusion.
I am pleased with our performance throughout the first half of the year as we delivered better than expected result in a challenging environment.
Looking ahead to the rest of the year, we are well positioned to delivered record results in each two.
On the back of our solid product portfolio health.
Healthy consumer demand and sign of improvement in the supply chain and settlement.
Beyond this year, the strong inventory replenishment cycle, new product introduction additional production capacity and the restaurant acquisition puts us in a good position to sustain our growth trajectory.
Lastly.
I. Thank all our employees for their hard work resilience and dedication our suppliers for doing all they can to meet our orders and our dealers for their support.
On that note I'll turn the call over to the operator for questions.
Thank you at this time I would like to remind everyone in order to ask a question press star one on your telephone keypad to withdraw your question Press Star One again, we'll pause for Goldman to compile the Q&A roster.
And your first question comes from Robin Farley from UBS. Please go ahead.
Great. Thanks for taking the question.
Obviously very strong results I'm just curious why your gross margin guidance is unchanged. When the revenue is higher just given your comments about improvements in.
And the logistics and commodity pieces with that higher revenue translating into I don't know, if you or perhaps you're just being conservative.
To hear your thoughts on that.
Yes.
Good morning, Robin obviously, there are pluses and minuses and building the guidance and obviously a better top line, which is good.
Improving the overall EBITDA as well.
Coming with higher revenues.
And so I'd say it's.
It's a variation between operating expenses and gross margin.
We'll be investing probably slightly more in operating expenses and Thats why you are not seeing the gross margin move.
It stayed flat.
Okay, great. Thanks, and then just one quick follow up.
Seeing anything in the environment, that's promotional from others. It sounds like obviously, continuing strong retail demand and lack of availability across the board, but just any thoughts there. Thanks.
So far I mean with CDN vitamin is quite stable like we saw in the last I would say 18 months.
Okay, great. Thank you.
Tim comes from <unk> <unk> from BNP. Please go ahead.
Hi, guys. Thanks for the question.
On a quarter to date retail sales up 20% being processed very impressive I guess, where do you think based shake out for the rest of the year and how do you think the industry is comparing relative to that 20%.
While if you look at our year to date through the first six months of our retail is.
Down 12%.
After six months and with the planned increase in wholesale and the better inventory position versus a year ago at the end of Q2.
Our expectation is that with total retail for the year for us would probably be high single digit is where we're targeting to win.
From an industry perspective, obviously.
Still limited by inventory.
And so I am expecting the industry to probably be in the <unk>.
Mid to low single digit overall industry growth for the full year.
Okay got it, but I guess to clarify that 20% quarter to date for you that's outperforming industry right.
While we don't.
The industry data as of mid.
In mid September .
But the number is based on.
Monday's data.
Year to quarter or quarter to date Monday.
So obviously, we don't have the industry data as of mid month.
Okay got it.
And then it sounds like Youre, making progress on the retrofit.
I mean, thats, helping the availability and some of the increases in the quarter to date retail, but just curious how many new.
New orders coming or are you still making.
Increasing the number of preorders I think pre orders were up 80% in Q1, where are we today and is there any way to kind of think about the pace of new orders coming in.
First on the retrofit side.
Like I said in my remarks, we receive a lot of component.
The month of July and a lot in the last week of July .
That.
I have been.
Deliver to the dealer and Thats. The reason why we sold the retail going up in Q3 and the supply chain are definitely getting better then we expecting the number of that quarter.
To go down significantly by the end of the year than this is.
Overall quite healthy.
Healthy in term of the.
And your second question on the preorders.
This time of the year, it's a bit difficult to read.
Snowmobile, obviously preorder are extremely high this didn't change and we've just came out of the club beginning of August with the.
The introduction of the CDU watercraft Sea-doo pontoon.
<unk>.
The side by side any television that we allocated till December the <unk>.
We'll vehicle and all of the boat and so far the reception of the dealer is excellent and like we said the booking because we introduced the product we have discretion on volume and booking are coming in right now and we're trending about 20% up.
Versus last year than <unk>.
Happy with that product will receive an <unk> and I would like to remind you that the dealer or the frontline they are dealing with the consumer and so far I mean, the momentum is great.
Okay got it thank you very much.
Thank you. Our next question comes from Noah <unk> from Deutsche Bank. Please go ahead.
Yes, thank you very much and congratulations for the results.
Just to come back on the strong retail performance so far in Q3.
<unk> up over 20% I was just wondering how much is driven by order place during the quarter versus those who have been made.
Fire to Q3, and if you could provide some color about the inventory replenishment whether this.
It is still around one 4 billion and mostly skewed towards fiscal 'twenty four or is it.
Trending a bit earlier than expected that would be great. Thanks.
Yes sure.
I'll pick up on the <unk>.
Inventory question in oil could cover also the order, but obviously when you look at the inventory and you compare it to where we were in Q1, that's up $400 million of the dealer network, we talked about the inventory opportunity replenishment one four.
You can appreciate that.
Significant portion of that inventory is related to seasonal products, such as personal watercraft and so a lot of the retail that is happening in August .
Awards for personal watercraft.
And even with the cyber incidents.
<unk> deliveries were lower than expected in August so I look today and my inventory in the network is actually lower than where it was in July .
So given the short term nature of the product that we shipped.
In July I E in terms of when it where they were supposed to be retail I would say that the $1 four opportunity is still there today.
And as in terms of the retail which happen when the orders from the consumers were placed these orders that have been with dealers and dealers hands for a long time, although as I said some of them were switch some of them were personal watercraft.
In season products and side by side the inventory is sold all of that.
That the consumers had placed these orders with the dealers several several months for several quarters ago.
Okay, that's great.
Just a question on the snowmobile obviously you have already pre sold a very good number of snowmobiles for the upcoming winter, but given the stock.
Right sell at Polaris that you see and are fortunate to gain market share ahead of the winter season or is most of the planned inventory you already sold out.
I mean, like we said been a high level of our skidoo model year 'twenty three are already sold to end consumers than there is always some in season model, but.
For sure it is difficult to see how our competitor will react and if they will slow down production because of all this.
But this make us even more confident that we will sell through everything we have we will shift to the dealer.
Before the end of the year.
Okay, perfect and last one for me do you see.
In terms of booking trend is there a larger interests for or do you see a big change in that mix versus between entry level and higher end products.
No no I know many of you have that question, but so far we didn't see any trends versus the low end.
It is interesting you know it was our first in person.
Dealer meeting beginning of August .
And we gave the allocation to the dealer now we hearing that many of dealer already sold our whole <unk> 23.
Allocation to end consumers same thing for <unk> switch.
And then.
I know we have some concern about the demand in the <unk> of the global economy, but so far we don't see that in our industries.
Okay, Congratulations and thanks for the time.
Thank you very much.
Your next question comes from Joe <unk>.
<unk> from Raymond James Please go ahead.
Thanks, Hey, guys good morning.
I guess first question on the ransomware attack.
I apologize if I missed this but did you guys quantify the <unk>.
Pat of the ransomware attack on maybe revenue across Q2 increase in Q3.
Yes. Good morning, Joe will first obviously the investigation is still ongoing and so there's certain information I can share with.
With you, but here's a few points that I can obviously cover first cyber security has been the priority of ERP for.
Several years, then we've made considerable investments.
And fiber.
We've obviously updated our plans based on the advice of experts over the years and making sure that we have the latest tools and technology and.
And our tools, we're able to quickly detect and filtration and limit the impact on our business and soon after we put our plan to progressively restart operations, making sure that.
Our systems and data were scrubbed to make sure that we're safe to restart the operations in terms of overall quantification as I said earlier in terms of.
Our guidance no impact on the <unk> guidance as we're able to offset it.
But when you combine the fact that our sites were closed for between one to two weeks and the fact that we could recoup with on weekends and overtime net net we probably lose 4% to five days of production.
Before the compensating effect of having more components in selling more.
Building more good unit.
Delivering these units to the network.
Okay, Alright, that's helpful and then second question.
You guys sounded pretty optimistic about supply chain getting better. This morning, I mean, how confident are you that what youre seeing is sustainable.
Just some puts and takes like.
Like we've seen in the past.
I mean like we said.
In Q2.
What happened in the summer I mean semiconductor.
Have improve.
And we are well in good position with our.
Suppliers for H two.
On top of it in term of logistic and transportation everything is easier and we have less case by case.
For the last 12 months, we had many many.
<unk> case every day every week and now we see.
<unk>.
A reduction in those case by case I'm happy because the procurement team around the world at VIP could.
Take some holiday then this is a good sign that things are improving.
Then that's why we are quite optimistic that we will be able to run.
All our factories at full capacity in the fall.
Okay, great. Thank you guys.
Your next question comes from Mark Petrie from CIBC. Please go ahead.
Hey, good morning.
Just wanted to actually ask with regards to the guidance, hoping you can give a bit of color regarding the pacing of growth between Q3 and Q4, obviously you heard the comment for potentially over 50% growth in Q3, but that still leaves a significant amount of growth for Q4.
In order to hit the sort of guidance. So could you just help us think about sort of the balance between Q3 and Q4 with regards to I guess revenues and margins.
Yes.
Sure we'll obviously.
When you look at the overall guidance margin wise, there is going to be an improvement happening in the second half of the year.
With.
Compared to where we were.
Bulk of the improvement in margin is going to happen, though in the fourth quarter with strong shipments of personal watercraft snowmobiles and side by side.
Year to date revenues.
Were both $4 2 billion were looking at back half of the year between 535 7 billion.
I'd say that the overall growth in revenue will be much higher than in Q4.
In line with EPS growth.
Until revenues Youre, probably in the range.
Colby.
60% of the revenue is going to be in Q4, and the remaining in Q3 and would be a fair a fair distribution.
Okay, and when we say as we think about sort of the pacing of growth into fiscal 'twenty four.
You mentioned that you are still of the belief that the $1 4 billion of.
Inventory replenishment opportunity I.
I think.
<unk> in place.
Into next year is the expectation effectively that that can be serviced.
Serviced in fiscal 'twenty, four or what's your current view on the sort of balance of your ability to supply and what youre seeing with regards to demand.
Just a just an additional comment and to answer to your question.
I would like to remind you that we had that capacity for watercraft and side by side.
But we were not able in each one to run the factory at full capacity because of the supply chain.
Now.
These two were running all our factory.
Good pace.
We have a video catch up because we receive components from supplier that will be a retrofit at the dealer level during Q3, and Q4 and next year.
The capacity is there if the demand is there we feel confident that we can run.
All operation at a higher level in fiscal year 'twenty four versus 'twenty three.
Okay, and then maybe just maybe just to clarify then so is your expectation that the retrofits will effectively be.
Sort of complete at the dealer level by the end of this year or is that going to remain in place for next year.
Our expectation is that we will ship very little if no <unk>, which was a retrofit units at the dealer in the fourth quarter, but we will still have some units in our inventory that we will need to.
Retrofit in the first half of next year.
But based on where the supply chain is trending today, we believe that we could move away from spending incomplete units to the dealers by the fourth quarter.
In terms of inventory opportunity, obviously, when we look at it we look at it from a year round products position I E. R V. In our seasonal product business. We know we will have personal watercraft inventory at the end of the year.
Because of the timing and productions will better timing of production this year versus last year.
And so.
But that inventory will be I E already sold or to.
To the dealer and dealers will have orders, we expect to still be low in the side by side ATV inventory.
In Q4.
Okay. That's helpful. Thanks, and then I guess, just one last one obviously you.
You've made a number of acquisitions.
More tuck in in nature and size I guess, but obviously important from a strategic perspective.
Just given.
The elevated capex in sort of the macro uncertainty maybe you could just.
Remind us of sort of your immediate capital priorities over the course of the next year and an APA.
Opportunity for four and CIB activity.
Yes, well if you look at what we've done in terms of share buybacks since the beginning of the year, we've purchased $300 million of shares and as we.
Obviously communicated to all of you in the past our priority has been investing in the business and so this year, we have an ambitious capex plan.
We also invested in working capital to manage through the supply chain headwinds and allow us to bring units quicker to the dealers by using a retrofit approach.
That obviously requires some capital investments.
And obviously the acquisitions that we're doing as well as us.
Is going to require.
Cash.
Probably to the tune of about $200 million. So that has always been our priorities, but resolve sold Ben.
Very diligent and being opportunistic in buying back shares.
Ensure that we maintain that financial flexibility and being opportunistic as something that we will obviously.
Pay close attention going forward as we've done in the past.
That's very helpful. Thanks, and all the best.
Thank you.
Your next question comes from Gerrick Johnson.
From BMO capital markets. Please go ahead.
Good morning, Thank you I am interested in seasonal particularly in the personal watercraft.
Is there a way to quantify switch contribution to seasonal in the quarter and then also as switch and Pwc retail when you report that retail and also related to.
The delay in Cedar shipments I think after last quarter, we are expecting an acceleration in <unk> seems to be pushed out.
Yes, well first.
<unk> does not built into the personal watercraft retail.
It's a different industry.
It is not included in those numbers.
In terms of overall contribution what I can tell you is that the expectation for seasonal this year as that switch will be 10% of our revenue.
And.
And so obviously a very good business for us.
And just your question Gary.
The delay in senior shipments.
Yes, what happened on the CD Shipman <unk> there was a critical component for.
<unk> specific to <unk>.
We receive.
Take shipments in July .
We had to reshape the component and Kip for the dealer and those were shipped.
The last two weeks of July and then the dealer received a component.
But <unk>.
Obviously retail.
Before the end of July that's why we see the face increasing in Q3, and I think there will be some more retail going on in the next few months and Thats what happened.
Okay, Okay got it great and then.
<unk>, how about the orders coming out of your club events are in line with your expectations.
We sold out everything we can produce is sold out to the dealers and we're hearing very good comment that.
Pre sell unit to consumer is extremely extremely strong.
Okay very good thank you.
Thank you.
Your next question comes from Mr. Laundry from Stifel GMP. Please go ahead.
Hi, good morning.
I just wanted to go back on the promotional environment and wondering what have you factored into.
Your <unk> guidance in terms of promotional activity and when do you think that we go back to promotional.
Promotional levels that are more aligned with historical levels.
We have done.
Given that we shipped some units later than what we would have liked.
For personal watercraft for three wheel there we have provided in the guidance.
A bit more.
A bit more promotion, but nothing significant as I said earlier, there is always some pluses and minuses.
That's one of the adjustments, we did but nothing.
Through significant.
But cautiously we're planning for it.
And in terms of going back to normal or obviously, our hope is that we don't go back to normal ever.
But.
We know that we're living today is exceptional and those probably going to be a.
A revised a new normal after after COVID-19.
Obviously dealers tell us they like operating with lower inventory all the Oems say it as well and there are some learnings from the last two years or three years that we know that we can apply going forward and being much more tactful and how we deploy programs.
Could we end up.
As I shared saving of 100 basis points overall from from less promotional.
Certainly something that we're pushing the teams to strive for.
Okay. That's helpful. And then maybe just switching gears to your acquisitions.
In the electric sector in urban mobility.
I was wondering im a bit curious with urban mobility I was wondering when we could see you launch.
Something in that sector and I was wondering if you can discuss the competitive landscape in urban mobility.
Is it a fragmented market and what does the distribution network and it looks like.
This is a.
Very general question Martin.
Let's say that this is definitely a segment that is growing.
Human assist product.
Very popular because many customer by it because obviously the D train when the ride their product in some.
Use the product for utility.
Then.
We are basically the three acquisition that we've done was to give us the additional knowhow.
The opinion gearbox.
Very very sophisticated small comeback gearbox that can be applied to many of our product line.
Then.
I will not comment this morning on what we're looking at but.
Again.
You can expect from us that we will enter in new category of product will and then we intend to invent new category of product.
And it's like my Best example is the <unk> electric I drew a foil I do a fall I've been around for many years.
But you need to be in that fleet to arrive.
Electric I do a foil.
The one that we lunching with the CD Horizon I'm sure you saw the video you can run it has a board and you can run it with the fall have deployed our full deploy very very easy to write for the whole family. Then this is what we intend to do is to democratize certain industry.
And come with Great innovation, and that's why we were confident we can drive.
Good market share in that $70 billion of bubble, but too early to give you more detail. This morning.
Perfect. Thank you.
Yes.
Okay.
Your next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning, Thanks for taking my questions you've addressed several already.
A point of clarification on slide six.
So when is revenue recognized on unfinished units at the dealer is it when the part and shipped to the dealer when it arrives at the dealer or when the part is installed.
The revenue is recognized when the partnership to the dealer.
Got it and maybe how long does it generally take to get to the dealer and how long does it take to have that part installed on average.
Take care.
Day, two a few days that we ship them.
Usually we have a overnight.
Overnight service that we get the parts of the dealers, we want to get them quickly as possible because we know consumers are waiting for the product.
And then I guess regarding that unfinished product at dealerships.
What are the most common parts shortages that wind shipped would allow them to be recognized as revenue and sold at retail.
Cluster the gauge like we explained before we have three type of cluster low medium and high end.
This is there isn't.
Microchip in there and the cluster has.
It's one of the most.
Critical component that we ship after assembly.
And this typically takes.
Cluster is very short, but let's see I have rage. It will takes between about 45 minutes.
Retrofit unit.
Great. Thank you.
Yes sure.
Okay.
Your next question comes from Cameron <unk> from National Bank Financial. Please go ahead.
Thanks, Good morning.
I guess, maybe just want to go back to an earlier question just around working.
Working capital.
And your wholesale inventories I mean, obviously, a significant part of the inventory increase on your balance sheet is related to these retrofits.
Maybe you can just discuss a little bit about how.
Maybe discuss what you think kind of a normal level of inventory on your balance sheet should be given the size of the size of the business now because we've seen obviously a significant increase over the last 18 months, but there are a lot of that is kind of unusual. So what do you think kind of a normal level of inventory should be for ERP with the size of the business now.
Yes, well, obviously, we have invested in working capital in the last few years raw material.
Four fifth and Theres lower actually finished good.
And the inventories on a record level of over $2 billion of on our books inventory.
My expectation is that in Q3 will still be running with high inventory, probably even some investments in working capital that are going to continued as we ramp up our production.
And.
The expectation is that should go down in.
In the fourth quarter.
Will it be a working capital cash generation element.
So when are we going to come back to normalize the inventory. Obviously, we are running today with higher raw material, because obviously, we want to have a bit more buffer in our planning.
And we are actually having discussions with the team as to okay, what's going to be that new level. Once we get to that more normal. There's one thing I am going to I do know is that finished good inventory is going to go up in the fourth and in the first.
Quarters of next year.
When will the raw materials come back down.
To more regular levels, it's still too early to call.
Okay.
Okay, Okay fair enough.
Maybe just second question on I guess again on the M&A. The Concord acquisition is more of a vertical integration for ERP can you maybe just go into a little more detail as to why you felt the need to bring some of that I guess supply in house and.
And is there anything else that you think it's critical that you think you need to bring in house potentially.
Potentially it could be an M&A opportunity for you.
Then first so we were about 80% of that division sales.
And there is many unique feature that we develop together over the years, we even have common pattern in certain area.
But I'll give you an example power steering.
We develop with them the power steering that we use on our ATV side by side and our three wheel vehicle units.
Unique to ERP and we believe.
We can accelerate the pace then its a combination of the <unk>.
Acquiring the Knowhow and also being self sufficient in key component.
Has the poorest during and this is only one part that's doing for us.
Okay do you think there's additional acquisitions you might want to do.
Two for other critical components.
I think at this point, we're looking obviously at opportunities all the time at this point.
There is no specific plan for this.
And again the acquisition of <unk> has two objectives. One obviously is the vertical integration doing it ourselves, but the other one was too.
Acquired a very talented team over there.
<unk> continued to push innovation and have a better coordination between our team here in Canada and their team.
Two to grow faster than it was like.
<unk> objective for our customer.
Okay makes sense alright, thanks very much thank.
Thank you.
Your next question comes from Jamie Katz.
Sir Please go ahead.
Hey, good morning, Thanks for squeezing me in I actually have a couple nuanced questions just on consumer behavior. I think you discussed the availability of credit I'm, saying that it seems pretty good but I'm curious whether the usage of credit for purchases has changed or if the quality of borrowers has changed.
Over time.
Good morning, Jamie when I look at the data for for Q2, when I look at the overall FICO scores compared to where we were pre pandemic and where we were last year. The FICO scores are actually higher.
Which is obviously a good sign on the people who apply for credit and while you might say well <unk> to get higher scores of the acceptance rates are lower but the acceptance rates are also trending higher.
Last year Q2, we were at 66% of acceptance rates from our financing partner this quarter, we're at 71% and when I look at the data just for August we're still trending higher at 73% of acceptance rate. So.
And so as we say we yes, we are looking at.
What's happening in the news and we are reading and listening.
So all the articles and looking at inflation, but the retail is remaining strong booking from dealers is strong and they are on the frontline website visits are also strong so we're.
We're not seeing any slowdown from the consumer.
In the interest in power sports and marine products.
Okay, and then I don't think it was bifurcated.
Between North America and international it seems like there was a little bit of a shift in the composition of sales is there anything that youre seeing broad.
Indicates that the cadence of demand might be slower than domestic.
Or any other trends that might be noteworthy.
In term of obviously, we're watching Europe , because in the context of the GE.
Shortage.
There is high inflation in some area, but if we look at the Q3 retail again in <unk>.
And it was.
Low double digit when in North America was mid double digit in Latam Latam was also mid.
Low double digit then basically in EMEA in Q2, despite all the pressure that we see or we hear about energy. The retailer was somewhat in line with what we saw in North America and Latam.
That's really helpful. Thank you.
And your next question comes from Brian Morrison from TD Securities. Please go ahead.
Yes. Thank you good morning, I just wanted to follow up on the earlier question on this on the guidance waiting.
Second half EPS, it looks like 30% will be Q3, and 70% Q4, and you talked about the supply chain improvements capacity improvement is this can you into Q4 as the cyber related is it supply chain is that the mix of retro products and with I guess in simplistic terms why can't we push through more retrofit in Q3.
Good question, Brian obviously, yes, the cyber incident impacted Q3.
Production some of the catch up is going to be happening, mostly in Q4 with overtime and.
And weekends and also the completion rates are going to be higher are expected to be higher in the fourth quarter. Obviously, we are working with the teams can we optimize and be better in Q3, that's something we always strive to do.
But.
Just the inherent.
We'll call it improvement of the supply chain and cyber incident are obviously waiting heavier.
In the third quarter.
Okay, and then I guess a higher level question, maybe for just say so when you discontinue to add when you signed the deal with Brunswick.
Does that agreement stays out with our stealth technology now in place or what does that relationship going forward.
No.
When we signed the agreement the new about our plan with the goals the Gulf.
Allergy.
And the agreement is going on.
So I guess what is the competitive response or what do you see the competitive.
What was what's your reaction to that in the new competitor with a strong competitor now in the place.
I don't know I mean again, if you look at the marine industry. It's a huge industry 36 billion and today, we have about half of $1 billion of revenue and that the industry. Then we have a long way to go but for US The division is to sell a complete product.
Like we do on all our other.
Product line that being said it will take a while before we get there, but the step by step we will continue to go there.
When we acquired the tailwater in Australia.
Mercury was not there and now they are our partner in Australia. Then there is some win win.
For for both company and the relationship continue.
Okay. Thank you congratulations.
Thank you Brian .
Your next question comes from Fred Wightman from Wolfe Research. Please go ahead.
Hey, guys. Good morning. Thanks for the question. So you had alluded to some potential tailwind is just on the raw material side.
No youre not really expecting that to hit this year, but is there any way that you could sort of put parameters around what that tailwind could look like as we think about next fiscal year.
While we.
Earlier in the year, we talked about a headwind coming from inflation and supply chain disruption of about 300 basis points. Obviously this year commodities are improving but.
We're kind of hedged are committed with our suppliers.
This year, so not much opportunity, but obviously that 300 basis point headwind is something that.
We would obviously be certain we will obviously work hard to remove or reduce next year.
And it brings a considerable opportunity for us going forward.
As we address it.
Got.
That makes sense and then on the updated guidance have you guys assumed or is there any.
Business interruption insurance.
As contemplated in that.
We obviously do have insurance coverage for cyber incidents where in the in the middle of.
Doing the computations, yes, we did file a claim with the insurance company.
And our guidance assumes.
Insurance will not be.
Or the insurance or the additional costs would be normalized from.
From those numbers.
Sorry, sorry, just to be clear so the business interruption insurance claim assuming that goes through would be incremental to the current guidance our current guidance.
Normalized would be normalized okay, alright. Thank you.
Hey, Dan if you'd like to ask a question press star one on your telephone keypad and your next question comes from Gerrick Johnson from BMO capital markets. Please go ahead.
Thanks, great. Thanks, so on the acquisitions, how is that impacting your guidance for the year and also especially in how is that.
Impacting the P&L from an accounting standpoint, given that these are some suppliers.
Well.
For this year no impact on the guidance there are relatively small acquisitions opinion relatively small business with a lot of opportunity. It will be presented in the power sport P&A and OEM engines are but.
No significant impact this year.
And <unk>, obviously, it's a.
Twofold as Rajeev said from a technology standpoint strategically either.
A good fit there and from a vertical integration, obviously is going to reduce the overall bill of material costs.
We expect some minor benefits this year.
But there is still operating in a tough supply chain environment.
And some most of the benefits will come next year.
But that's the impact.
Nothing.
Super material.
Yes.
Okay. I was just wondering about the accounting for it. So this is not adding revenue since they were.
Supply components or is there.
Some revenue.
Or is it a recall.
No no revenues, it's going to be a cost advantage.
The next year.
Okay. Okay. Thank you.
And there are no further questions at this time I will turn the call back over to Mr de <unk> for closing remarks.
Super Thank you, Jamie and thanks, everyone for joining us this morning and for your interest in VIP. We look forward speaking with you again for our third quarter conference call on November 30th have a good day everyone.
This concludes today's conference call you may now disconnect.
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The host has ended this call Goodbye Lenny meta has a question.